Friday, October 09, 2015

Higher Oil Prices Down the Road

Putin's cleverly orchestrated action in the Middle East seems likely to trigger a major oil price rise - something that would be very good for the economies of oil producers like Russia, but would be bad for the economies of heavy oil importers like India.

In recent times, we've seen positive movement in India's economy - investment has been continuing, inflation has been moderating, recently affording the opportunity to lower interest rates - things which if continued could help India's economy to break out of its rut and enter a takeoff phase.

But this nice spell of balmy weather is going to end. The Russians have shown that they are very astute gamesmen, and are capable of seizing opportunities to prevent their own power and influence from eroding. India is going to be hit with significant collateral damage from this Russian masterstroke, as an oil price shock (as planned by Putin) will significantly impact energy costs and overall cost of living for Indians.

Will Modi be forced to bring back fuel subsidies once again? That represents a huge expenditure burden, and will take a chunk out of the budget. The predatory disloyal opposition will raise a cry of the pain of the common man if it doesn't happen, and will scoff at Modi's commitment to reforms if he does. Unfortunately, the preferable solution will be to bring back the subsidy rather than suffer a loss a the polls.

As oil prices increase, American frackers will see their profit margins increase, which should revive the fortunes of this previously fast-growing sector.

It will take some time before Putin can fulfill his gambit in regaining control over Syria by routing the Islamist rebel opposition, and in coordinating with Iran to re-shape the region. So there should be some time before a supply squeeze can be engineered. In the meantime Modi will have to re-shape the Rajya Sabha after winning more seats through Bihar, etc, casting aside opposition obstructionism in order to push through deeper reforms. It may be a race to see who can change their situation faster, Russia or India.